7 Things to Consider Before Investing in Commercial Real Estate
Investing in commercial real estate makes you part of an incredibly impactful segment of the US economy. In fact, current estimates place commercial real estate alone as a $1 trillion sector, and it has proven more resilient throughout the pandemic than residential housing. Before entering the fold of the commercial real estate investor, or if you plan to grow your holdings, pay close attention to the following factors.
1. Where the Property Is Located
The viability of most commercial real estate investments hinges on location. When picking based on location, you want to focus on two key factors: the amount of foot traffic and the ease of getting in and out.
Commercial properties that are geographically easy to get to (and leave from) will always be perceived as having higher value. Consumers do not wish to be inconvenienced when looking for a place to spend their money.
When your business is hard to reach, that also deters any foot traffic you might have otherwise received had you been in a prime location. No foot traffic means it’s harder to educate your consumers, create relationships, and grow your brand.
2. How Much You Will Need to Invest Beyond the Sale
Something you need to keep in mind when buying commercial real estate is that the purchase price is only a part of the deal. Many commercial buildings are older and more costly to maintain.
Only sign your name on the dotted line when you have a granular sense of what the full move will cost you. Failing to do so could set you up for additional loans at higher interest rates in the days ahead.
3. What the Demographics Are in the Region
Take any commercial real estate for beginners course out there, and you should hear talk of demographics. This matters when you are selling a product or service that depends on geography in some way (pretty much all brick-and-mortar businesses).
Some products and services appeal to a niche group of people who only live and shop in one area. Other products and services have a more general appeal, and a good location could be anywhere on the path to and from their work each day.
Answer the granular questions about your market. Here are some good ones to start:
- How old is the ideal customer?
- What is their gender identity?
- What is their household income?
- What type of work do they do?
- Is there any relevant significance between their racial/ethnic/religious background and your business?
These questions will give you a great sense of who your customer is. That can also be a highly influential factor in determining a location with the highest degree of visibility for your core demographics.
4. What the Current Economic Conditions Say
Many economic indicators will matter to the success of your commercial property. Lower interest rates make it easier to procure loans to purchase a property. Higher wages translate to greater spending, from which your industry may benefit.
Multifamily rental units are commercial real estate that does better when residential prices are soaring. Mixed-use commercial real estate can create opportunities for rental and consumer-facing business income.
The key is to know how the economy is doing relative to the types of commercial real estate you’re investing in. There are eight basic types. They are:
- Retail stores
- Hotels and restaurants
- Special purposes (bowling alleys, stadiums, cinemas)
5. Government Activity Surrounding Your Industry
The government will regulate some industries more rigidly than others. It is important to know what’s going on locally, nationally, and federally surrounding your specific industry.
The decisions they make or don’t if you ask the cab industry, can have disruptive ramifications on your business based on location and overhead. Just ask the cab industry.
6. Other Properties in the Area
Real estate laws vary from location to location. They’re usually set by municipalities based on specific “uses” (see the eight types under section no. 4).
These designated land uses are important to where you buy, what you can legally buy, and how much you will pay. You might dream of starting a storage facility in the middle of town, but if the zoning isn’t set for that, you’re out of luck.
By the same token, owning a property in an area with little commercial appeal will not be very fruitful in the long run. (No, Field of Dreams, if you build it, they are probably not going to come!)
7. Income Potential
Last but definitely not least on this list of considerations before investing in commercial real estate is this. What income will your commercial properties earn you over time?
An easy way to calculate this is knowing the current market value of each unit, multiplied by the number of months in your lease. Create a best-case scenario chart of 100 percent occupancy and scale it back 30 percent from there. That should help you plan for any broken deals or times without a tenant for the period of time you’re considering.
Your Next Steps to Investing
You now know what to consider before you buy. Here are the steps you need to take as you move toward a purchase.
Determine How Your Leases Will Be Structured
A multifamily lease is generally six months to a year, but commercial leases come with higher expectations. Try to lock your tenants in for one-, two-, or multi-year contracts to guard against high vacancy percentages.
Pay for a Cost-Benefit Analysis on the Property
Look at the taxes, fees, and maintenance expenses the buildings will require. Adjust rental prices based on what it will take to make the property financially viable. You may wish to hire a professional cost-benefit analysis before making a purchase.
Hire an Attorney
Working with a commercial property lawyer ensures that you don’t miss any of the key details necessary for being a commercial property owner. This is a complicated piece of law, so only hire specialists to help you work out the details.
Investing in Commercial Real Estate Can Be Complicated Without Guidance
Investing in commercial real estate is certainly worth your time and money. However, you’ll likely need legal guidance when navigating the complexities that lie therein.
Do the math, structure leases that favor profitability, and work with an attorney skilled in commercial property law as you wade these waters. For more real estate tips and information, check out some of our additional posts!